Activision, Inc. is a leading international publisher of interactive entertainment software products. The company has built a diverse portfolio of products that span a wide range of categories and target markets and that is used on a variety of game hardware platforms and operating systems. The company has created, licensed and acquired a group of highly recognizable brands that it markets to a growing variety of consumer demographics. Its fiscal 2007 product portfolio included such best selling products as Call of Duty 3, Guitar Hero II, Tony Hawk's Project 8, Tony Hawk's Downhill Jam, Marvel: Ultimate Alliance, Over the Hedge, and X-Men: The Official Game.

Activision's products cover the action/adventure, action sports, racing, role-playing, simulation, first-person action and strategy game categories. The company's target customer base ranges from casual players to game enthusiasts, children to adults, and mass-market consumers to value buyers. The company offers its products in versions that operate on the PLAYSTATION® 3 and PlayStation 2 computer entertainment system consoles from Sony Computer Entertainment, Xbox 360™ video game and entertainment system, Xbox™ video game system from Microsoft, Nintendo® Wii™, Nintendo Game Boy® Advance ("GBA"), Sony PlayStation Portable™ ("PSP") and Nintendo Dual Screen™ ("NDS") hand-held devices as well as on personal computers ("PC").

The installed base for this current generation of hardware platforms is significant and we anticipate that the calendar 2005 release of the Xbox 360, and the 2006 releases of the PlayStation 3 ("PS3") and the Nintendo Wii ("Wii") will further expand the software market. We had a successful and significant presence at the launches of the PS3 and the Wii with three launch titles for the PS3, Call of Duty 3, Marvel: Ultimate Alliance, and Tony Hawk's Project 8, and five launch titles for the Wii, Call of Duty 3, Marvel: Ultimate Alliance, World Series of Poker: Tournament of Champions, Rapala Tournament Fishing, and Tony Hawk's Downhill Jam.

The company's publishing business involves the development, marketing, and sale of products directly, by license or through its affiliate label program with certain third-party publishers. Its distribution business consists of operations in Europe that provide logistical and sales services to third-party publishers of interactive entertainment software, its own publishing operations and manufacturers of interactive entertainment hardware.

Activision completed a number of acquisitions of both software development companies and interactive entertainment product distribution companies. In May 2006, it acquired video game publisher RedOctane Inc., the publisher of the popular Guitar Hero franchise.

Activision's objective is to be a worldwide leader in the development, publishing and distribution of quality interactive entertainment software and peripheral products that deliver a highly satisfying consumer entertainment experience. The company's business strategy, the key components of its business operations and the risk factors that could impact its business are detailed below.

Create, Acquire and Maintain Strong Brands. Activision focuses its development and publishing activities principally on products that are, or have the potential to become, franchise properties with sustainable consumer appeal and brand recognition. It is the company's experience that these products can then serve as the basis for sequels, prequels and related new products that can be released over an extended period of time. The company believes that the publishing and distribution of products based in large part on franchise properties enhances predictability of revenues and the probability of high unit volume sales and operating profits.

Activision has entered into a series of strategic relationships with the owners of intellectual property pursuant to which it has acquired the rights to publish products based on franchises such as Marvel Characters, Inc. properties, including Spider-Man and X-Men.

Additionally, it has a multi-year, multi-property, publishing agreement with DreamWorks LLC that grants Activision the exclusive rights to publish video games based on DreamWorks Animation SKG's theatrical release "Shrek 2," which was released in May 2004, "Shark Tale," which was released in September 2004, "Madagascar," which was released in May 2005, as well as "Over the Hedge," which was released in May 2006, and all of their respective forthcoming sequels, including "Shrek the Third," which was released in May 2007 and "Madagascar 2."

As part of its agreement with DreamWorks Animation, Activision also has the exclusive video game rights to potential future films in the "Shrek" franchise beyond "Shrek the Third," upcoming movies, including "Bee Movie" and "Kung Fu Panda," as well as other films currently in development, including "Creature Feature" and "How to Train Your Dragon."

Activision has a strategic alliance with Harrah's Entertainment, Inc. that grants it the exclusive, worldwide interactive rights to develop and publish "World Series of Poker" video games based on the popular World Series of Poker Tournament.

Activision also has a strategic relationship with professional skateboarder Tony Hawk through an exclusive multi-year agreement to develop video games using his name and likeness. Through fiscal 2007, the company has released eight successful titles in the Tony Hawk franchise.

The company also has created a number of successful internally developed intellectual properties such as the True Crime and Call of Duty franchise properties, and GUN.

Activision also has agreements with MGM Interactive and EON Productions Ltd. to develop and publish video games based on the James Bond license and with Hasbro Properties Group to develop and publish video games based on the "Transformers" brand. The company released its first title under the Hasbro license, Transformers The Game, concurrently with the DreamWorks Pictures and Paramount Pictures Corporation motion picture release, "Transformers," in July 2007.

Execute Disciplined Product Selection and Development Processes. The success of Activision's publishing business depends, in significant part, on the company's ability to develop high quality games that will generate high unit volume sales. Its publishing units have implemented a formal control process for the selection, development, production and quality assurance of its products. The company applies this process, which it refers to as the "Greenlight Process," to all of its products, whether externally or internally developed. The Greenlight Process includes in-depth reviews of each project at four important stages of development by a team that includes many of the company's highest-ranking operating managers and coordination between its sales and marketing personnel and development staff at each step in the process.

Activision develops its products using a combination of its internal development resources and external development resources acting under contract with the company. It typically selects external developers based on their track record and expertise in producing products in the same category. One developer will often produce the same game for multiple platforms and will produce sequels to the original game. The company believes that selecting and using development resources in this manner allows it to leverage the particular expertise of its internal and external development resources, which it believe adds to the quality of its products.

Create and Maintain Diversity in Product Mix, Platforms and Markets. Activision believes that maintaining a diversified mix of products can reduce its operating risks and enhance profitability. Therefore, the company develops and publishes products spanning a wide range of product categories, including action/adventure, action sports, racing, role-playing, simulation, first-person action and strategy. The company also develops products designed for target audiences ranging from casual players to game enthusiasts, children to adults and mass-market consumers to "value" buyers. Presently, it concentrates on developing, publishing and distributing products that operate on PS3, PS2, Xbox 360 and Wii console systems, GBA, PSP, and NDS hand-held devices and the PC. It typically offers its products for use on multiple platforms in order to reduce the risks associated with any single platform, leverage its costs over a larger installed hardware base and increase unit sales.

Continue to Improve Profitability. Activision continually strives to manage risk and increase its operating leverage and efficiency with the goal of increased profitability. The company believes the key factor affecting its future profitability will be the success rate of its product releases. Therefore, its product selection and development process includes, as a significant component, periodic evaluations of the expected commercial success of products under development. Through this process, for titles that the company determines to be less promising, corrections are made in the development process or, if necessary, they are discontinued before it incurs additional development costs. In addition, it believes its focus on cross platform releases and branded products will contribute to improved profitability.

Activision continues to focus on increasing its margins. The company has, for example, acquired certain experienced and specialized developers in instances where it can enhance profitability through the elimination of royalty obligations. Additionally, it often relies on independent third-party interactive entertainment software developers to develop some of its software products, thereby taking advantage of specialized independent developers without incurring the fixed overhead obligations associated with increased internally employed staff.

Activision's sales and marketing staff work with its studio resources to increase the visibility of new product launches and to coordinate the timing and promotion of product releases. The company's finance and sales and marketing personnel work together to improve inventory management and receivables collections. It has instituted broad, objective-based reward programs that provide incentives to management and staff throughout the organization to produce results that meet its financial objectives.

Grow Through Continued Strategic Acquisitions and Alliances. The interactive entertainment industry has been consolidating, and Activision believes that success in this industry will be driven in part by the ability to take advantage of scale. Specifically, smaller companies are more capital constrained, enjoy less predictability of revenues and cash flow, lack product diversity and must spread fixed costs over a smaller revenue base. Several industry leaders are emerging that combine the entrepreneurial and creative spirit of the industry with professional management, the ability to access the capital markets and the ability to maintain favorable relationships with developers, intellectual property owners and retailers. Through numerous completed acquisitions since 1997, Activision believes that the company has successfully diversified its operations, channels of distribution, development talent pool and library of titles, and has emerged as one of the industry's leaders. It intends to continue to evaluate the expansion of its resources through acquisitions, strategic relationships and key license transactions. The company also intends to continue expanding its intellectual property library through key license transactions and strategic relationships with intellectual property owners and to continue to evaluate opportunities to increase its development capacity through the acquisition of or investment in selected experienced software development firms.